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54 TOSHIBA Annual Report 2014
Toshiba Corporation and Subsidiaries
March 31, 2014
Notes to Consolidated Financial Statements
20. FINANCIAL INSTRUMENTS
(1) DERIVATIVE FINANCIAL INSTRUMENTS
The Group operates internationally, giving rise to exposure to market risks from fluctuations in foreign currency exchange
and interest rates. In the normal course of its risk management efforts, the Group employs a variety of derivative financial
instruments, which are consisted principally of forward exchange contracts, interest rate swap agreements, currency
swap agreements and currency options to reduce its exposures. The Group has policies and procedures for risk
management and the approval, reporting and monitoring of derivative financial instruments. The Group's policies
prohibit holding or issuing derivative financial instruments for trading purposes.
The Group is exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial
instruments, but the Group does not anticipate any credit-related loss from nonperformance by the counterparties
because the counterparties are financial institutions of high credit standing and contracts are diversified across a number
of major financial institutions.
The Group has entered into forward exchange contracts with financial institutions as hedges against fluctuations in
foreign currency exchange rates on monetary assets and liabilities denominated in foreign currencies. The forward
exchange contracts related to accounts receivable and payable, and commitments on future trade transactions
denominated in foreign currencies, mature primarily within a few years of the balance sheet date.
Interest rate swap agreements, currency swap agreements and currency options are used to limit the Group's exposure
to losses in relation to underlying debt instruments and accounts receivable and payable denominated in foreign
currencies resulting from adverse fluctuations in foreign currency exchange and interest rates. These agreements mature
during the period 2014 to 2021.
Forward exchange contracts, interest rate swap agreements, currency swap agreements and currency options are
designated as either fair value hedges or cash flow hedges, except for some contracts, depending on accounts receivable
and payable denominated in foreign currencies or commitments on future trade transactions and the interest rate
characteristics of the underlying debt as discussed below.
Fair Value Hedge Strategy
The forward exchange contracts and currency swap agreements utilized by the Group effectively reduce fluctuation in
fair value of accounts receivable and payable denominated in foreign currencies.
The interest rate swap agreements utilized by the Group effectively convert a portion of its fixed-rate debt to a floating-
rate basis.
The gain or loss on the derivative financial instruments designated as fair value hedges is offset by the loss or gain on
the hedged items in the same location of the consolidated statements of income.
Cash Flow Hedge Strategy
The forward exchange contracts and currency options utilized by the Group effectively reduce fluctuation in cash flow
from commitments on future trade transactions denominated in foreign currencies for the next 7 years and 1 year,
respectively.
The interest rate swap agreements utilized by the Group effectively convert a portion of its floating-rate debt to a
fixed-rate basis for the next 7 years.
The Group expects to reclassify ¥51 million ($495 thousand) of net income on derivative financial instruments from
accumulated other comprehensive loss to net income (loss) attributable to shareholders of the Company during the next
12 months due to the collection of accounts receivable denominated in foreign currencies and the payments of accounts
payable denominated in foreign currencies and variable interest associated with the floating-rate debts.
Derivatives Not Designated as Hedging Instruments Strategy
The Group has entered into certain forward exchange contracts, interest rate swap agreements, currency swap
agreements and currency options to offset the earnings impact related to fluctuations in foreign currency exchange rates
on monetary assets and liabilities denominated in foreign currencies and in interest rates on debt instruments. Although
some of these contracts have not been designated as hedges as required in order to apply hedge accounting, the
contracts are effective from an economic perspective. The changes in the fair value of those contracts are recorded in
earnings immediately.